Index

  • Page numbers followed by f and t refer to figures and tables, respectively.
  • B
  • Bayes' rule, 67
  • Behavioral economics, 6, 12, 13, 165, 173–174, 177, 183, 187, 192, 212
  • Behavioral finance, x, 13
  • Behavioral portfolio theory (BPT), 8–9
  • Bellman's dynamic programming technique, 46–47
  • Benchmarks (benchmarking), 80, 125, 128–129, 132, 201–202
  • Bernoulli, Daniel, 2–3, 182–184
  • Bhansali, Vineer, 80n9, 175n2, 216
  • Bid‐ask spread, 119
  • Binary distributions, 165
  • Binomial distributions, 166
  • Bitcoin, 169
  • Black and Litterman model, 63
  • The Black Swan (Taleb), 138
  • BPT (behavioral portfolio theory), 8–9
  • Breakeven price, 76
  • Brier score, 132–133
  • Brownian motion, 90
  • Brunel, Jean LP, ix–xiii, xvii, 8–10, 14, 24, 35, 199, 215
  • “Buckets” (in mental accounting), 7
  • “Bucket approach,” xi
  • C
  • Capital market expectations, 38, 39, 39t, 45–50, 53, 54t–55t, 59–61, 109, 115–117, 116t, 132, 133, 143–145, 202, 206, 211, 216
  • Capital markets, understanding, 210
  • “Certainty threshold,” 47–49
  • CFA Institute, 215
  • Chain rule, 61
  • Chen, P., 89
  • Chhabra, A., 15
  • Client(s):
    • feedback from, 32
    • helping, to develop clarity of goals, 37–43, 39t, 40f, 42t
    • reporting to (see Reporting)
    • understanding, 210
  • Coin flips, 2, 169, 175, 179–184, 189
  • Complete (axiom of rational choice theory), 12, 17
  • Computing power, 43, 112, 209
  • Constitutions, family, 153–154
  • Constraints, real‐world, xvii
  • Continuous (axiom of rational choice theory), 12
  • Convexity, 138
  • Creativity, 124
  • Cumulative prospect theory (CPT), 7, 188, 192
  • D
  • Das, Sanjiv, xi, 8–9, 46, 215
  • Deguest, R., 15, 131
  • Descriptive theories, 13
  • Douady, R., 138
  • “Double dipping” of assets, 142
  • Downside risk, 75
  • Dual shareholder‐operator role, 150–153
  • Duty, family members' sense of, 149–150
  • Dynamic Hedging (Taleb), 215
  • Dynastic wealth, 158–159
  • E
  • Economic theory, 173
  • Effective shareholders, 150
  • Efficient frontier, xi, 25–27, 43, 46, 161–163, 177, 190
  • Emotional intelligence, 210
  • Employees, shareholder's responsibility for, 152
  • Enterprising Investor (blog), 215
  • Entrepreneurs (entrepreneurship), 147, 148
  • ESG objectives and constraints, 98–99, 135, 203
  • Estate taxes, xiii
  • ETFs, 78, 119
  • Ethical objectives, 149, 203. See also Impact investing
  • Event significance, effect of linear increases in, 138–139
  • Expected Returns (Ilmanen), 215
  • Expected shortfall (of a goal), 131
  • Expected value theory, 1–2, 175, 182–183
  • F
  • Failure, probability of, 8, 9, 22–26, 34, 59–62
  • Fama, Eugene, 72
  • Family businesses, 149–151, 213
  • Family constitutions, 153–154
  • Family governance, 151–156
  • Family narratives, 155
  • Family trusts, ix
  • Family vision, 155
  • “Fat tails,” 68
  • Feedback, client, 32
  • “Feepocalypse,” 205, 214
  • Financial Analysts Journal, 215
  • Financial goals, xix
  • Financial losses, 6–7
  • Financial Modeling Under Non‐Gaussian Distributions (Jondeau, Poon, and Rockinger), 215
  • Financial plans (financial planning), xviii, xx, 21, 89, 121, 125, 139, 199–204, 216
  • Finke, Michael, 21–22
  • Forbes 400 wealthiest people list, 158, 159n6
  • Foundations, 155
  • “Four stakeholders,” xii
  • Fractal Market Analysis (Peters), 196–197, 215
  • Fragility analysis of goals‐based inputs, 137–146, 141f
  • Friedman, Milton, 3–4
  • Friedman‐Savage paradox, 3–4, 7, 174–179
  • Future wealth, as variable, 143
  • G
  • Gambling, 1–2, 16n10, 27–28, 161, 163, 174–178, 182–184, 186–192, 191f
  • Gamma risk, 138
  • Gaussian distributions (Gaussian return assumption), xvi, 10, 18–20, 33n4, 41n8, 50, 53, 66–73
  • Glide‐path portfolios, 207
  • Goals, xv
    • allocation across, 24, 31–43, 42t
    • ascertaining relative value of, 31–32, 129
    • aspirational, 16, 27
    • financial, xix
    • having multiple, 14, 17
    • helping clients develop clarity of, 37–43, 39t, 40f
    • process of setting, 20
  • Goals‐based investing, xvii, xixf
  • Goals‐based investors, xv–xix, 192–197, 194f
  • Goals‐based portfolio theory, xvi, xx, 6, 10
  • Goals‐based utility theory, 3, 175n2, 183, 192, 197
  • Goals‐based wealth management, x–xii
  • Goals‐Based Wealth Management (Brunel), 10, 14, 215
  • Governance, family, 151–156
  • Graham, Benjamin, 4, 20
  • Granularity, in valuing goals, 32–33
  • Graphics, in reporting, 129, 130f, 131
  • Guillemette, Michael, 21–22
  • H
  • Hedging (hedged portfolios), 81–84, 81t, 82f, 211
  • Heuristics, 11
  • High‐variance assets, 161–171
    • angel investments, 165–166, 168
    • and aspirational goals, 162–163
    • cryptocurrencies, 169, 171
    • and efficient frontier, 161–163
    • volatility–return tradeoff with, 163–164, 164f
    • YOLO trades, 164
  • Human capital, 17, 89, 122, 134–135
  • Human risks, 147–159
    • dual shareholder‐operator role, 150–153
    • dynastic wealth, 158–159
    • family governance, 151–156
    • training of the next generation, 148–150, 152–153
    • trust and loyalty, 156–157
    • vision, 155
  • Hunt family, 158
  • I
  • Ibbotson, R. G., 89
  • Ilmanen, Antti, 216
  • Impact investing, 97–107
    • effect of market shifts on, 105
    • and ESG constraints, 98–99, 203
    • and generational differences, 105
    • and Maslow‐Brunel pyramid, 105
    • and modeling the client's point of indifference, 100–103, 101f
    • and philanthropic goals, 102–103
    • and reporting, 135
    • and willingness to sacrifice return, 103, 104f, 105
  • Implementation plans, 155–156
  • Independent (axiom of rational choice theory), 12–13
  • Indifference, 12
  • Inflation, 90–95, 92f, 93f, 137, 139, 143–146
  • Insurance, xii–xiii, 85–96, 212–214
    • amount needed, 89
    • and annuities, 85, 86, 93–94
    • estimating value of, 86–89, 88f
    • increasing customization of, 95
    • and inflation, 90–96, 92f, 93f
    • and monetary/mortality risk, 90
    • from perspective of the purchaser, 86
  • The Intelligent Investor (Graham), 4, 20
  • Investments, allocating across, 31–43
  • “Is Your Alpha Big Enough to Cover Its Taxes?” (Jeffrey and Arnott), 6
  • J
  • Jeffrey, Robert, 6
  • Jondeau, Eric, 216
  • Journal of Financial Planning, 216
  • Journal of Impact and ESG Investing, 216
  • Journal of Wealth Management, 215
  • K
  • Kahneman, Daniel, x, 6–7, 188, 192
  • Kitces, Michael, 216
  • Kronecker product, 51–52
  • L
  • Lazy shareholders, 150
  • Leverage, xv–xvi, 25, 66, 162
  • Levy‐alpha‐stable distributions, 67, 68, 69f–71f
  • Linear increases in event significance, effect of, 138–139
  • Liquidity (liquidity risk), 110, 119, 121–123, 195–197
  • Logistic cumulative distribution function, 23–26, 111, 163, 177, 193
  • Logistic distributions, 25, 53, 88, 99, 164f
  • Losses, portfolio, 6–7, 9, 73–78, 81, 83, 128–129, 213
  • Loss tolerance, time horizon's effect on, 74, 74f, 75, 76–78, 77f
  • Lottery tickets (lottery‐like investments), 7, 39t, 41, 42–43, 42t, 161, 164, 165, 174, 176, 212
  • Loyalty, 156–157
  • M
  • Mandelbrot, Benoit, 72
  • Maps, usefulness of, 11
  • Marginal theory of utility, 2
  • Markets, xvii, xxi, 65–67
  • Market downturns, 69, 70
  • Market shifts, effect of, on impact investing, 105
  • Markowitz, Harry, xi, 4–6, 8–9, 12, 19, 20, 188, 209
  • Martellini, L., 15, 131
  • Maslow, Abraham, 7
  • Maslow‐Brunel pyramid, 14–16, 15f, 27, 86, 105, 157, 162, 176, 212
  • Maslowian hierarchy of needs, 7, 14–16, 15f, 27
  • Mean‐variance efficient frontier, 25
  • Mental accounting, 7–8
  • Milevsky, M. A., 89
  • Milhau, V., 15, 131
  • Models, 47, 146, 209–210
  • “Model portfolio” approach, 46–47
  • Modern economics, beginnings of, 1–3
  • Modern portfolio theory (MPT), 5–6, 11, 20–29, 43, 161–164
  • Modern Portfolio Theory and Investment Analysis (Elton et al.), 162–163
  • Monte Carlo simulations, 33, 35, 40–41, 73, 139–140
  • Morgenstern, Oskar, 3, 12–13, 187
  • MPT, see Modern portfolio theory
  • N
  • Needs, psychological and physical, 7
  • Newton, Isaac, 173
  • New wealth, ix–x
  • Next generation, educating and training the, 148–150, 152–153
  • Normative economics, 173–174, 176–177, 180, 183, 191–192
  • Normative finance, 13
  • O
  • Odean, Terrence, x
  • Old wealth, ix
  • Optimizers, for allocating wealth through time, 45–48, 60–63, 62f
  • Option contracts, 171
  • P
  • Pareto distributions, 165–167
  • P/E ratios, 195
  • Peters, Edgar, 196–197, 216
  • Philanthropic goals, 102–103
  • Physical needs, 7
  • PMs, see Portfolio managers
  • Pool of wealth, 17
  • Poon, Ser‐Huang, 216
  • Portfolio construction problem, 14
  • Portfolio losses, 9, 73–78, 81, 83, 128–129, 213
  • Portfolio managers (PMs), 76, 115, 116, 119–122, 126, 128, 131–134, 204, 205f, 213–214
  • Portfolio optimization:
    • across‐goal, 34–35
    • in modern portfolio theory, 21, 27f
    • within‐goal, 33–34
  • “Portfolio Selection” (Markowitz), 4, 12
  • Prescriptive theories, 13
  • Price‐setters, xvii
  • Private wealth, ix
  • Probability weighting function, 188, 189f
  • Psychological needs, 7
  • Q
  • Quantitative skills, 210
  • R
  • Rabin, Mathew, 180–182
  • Ranked‐choice voting, 158n4
  • Rational choice theory, 3–4, 12–20
    • modern portfolio theory vs., 20–29
  • Real‐world constraints, xvii, 10, 19–20, 47, 162
  • Recession of 2008, 45, 73, 125
  • Regulators, 135, 171, 201, 204, 214, 215
  • Renaissance, 1
  • Reporting, 125–135, 201–202
    • and accuracy of forecasts, 132–134
    • Brier score in, 132–133
    • deficiencies of goal‐based, 134–135
    • example of goals‐based, 126–128, 127f
    • expected shortfalls in, 131
    • and human capital, 134–135
    • and impact investing, 135
    • relative performance in, 128–129
    • visuals/graphics in, 129, 130f, 131
  • Required return, 23, 25–27, 33, 43, 45, 52, 59–61, 101, 101f, 104f, 105, 128, 130f, 131–132, 162, 163, 166, 206, 206t
  • Retirement funds, “double dipping” from, 142
  • Risk(s):
    • as volatility,
    • as probability of failing to achieve a goal,
    • downside vs. upside, 75
    • gamma, 138
    • time until a goal,
    • human, 147–159
  • Risk tolerance, xviii, 21–22, 75
  • Risk‐tolerance questionnaires, 21–22, 28, 32, 204, 214–215
  • Rockefeller family, 158
  • Rockinger, Michael, 216
  • Roy, AD, 4–5
  • S
  • “Safety First and the Holding of Assets” (Roy), 4–5
  • “Safety‐first” criterion, 5
  • St. Petersburg paradox, 183–187, 185f
  • Samuelson, Paul, xvi, 72, 179–182
  • Samuelson's paradox, 179–182
  • Savage, L., 3–4
  • Scheid, Jonathan, xi, 8–9
  • Shareholders, lazy vs. effective, 150
  • Shefrin, Hersh, x, 8
  • Shiller, Robert, 3
  • Short selling, xv–xvi, 25, 66, 162, 209
  • Single‐premium immediate annuities (SPIAs), 94
  • S&P 500 index, 66, 67f–69f, 72f
  • Spendthrifts, xix
  • Star Trek, 151–152
  • Statistical Consequences of Fat Tails (Taleb), 216
  • Statman, Meir, xi, 8, 15
  • “Stay‐wealthy” approach, “get‐wealthy” vs., 147–148
  • Stop‐losses, 75
  • Subperiods, 49–50, 60
  • T
  • Tail‐heavy distributions, 169
  • Tail Risk Hedging (Bhansali), 80n9, 175n2, 216
  • Taleb, Nassim, 67, 138, 216
  • Taxes, 6, 109–124, 206–207, 212–213
    • and asset location, 120–122
    • and benefit of taxation, 120
    • and calculation of allocation matrix, 114–116, 115t, 116t
    • estate, xiii
    • importance of considering, 109–110
    • and liquidity risk, 121
    • and rebalancing, 112–114, 119–123
    • and transaction costs, 119–120
    • and utility maximization, 110–112
  • Tax‐drag, 6
  • Technology, 24, 95, 112, 116, 135, 202–205, 211. See also Computing power
  • Thaler, Richard, x, 7–8, 176, 180–181
  • Theories, usefulness of, 11
  • The Theory of Games and Economic Behavior (von Neumann and Morgenstern), 3
  • Time, allocating wealth through, 45–63
    • and capital market expectations, 45–50, 53, 54t–55t, 59–61
    • and “certainty threshold,” 47–49
    • and coming period, 45–46
    • and computational times vs. accuracy, 62f, 63
    • and fragility, 144
    • and multiperiod capital market expectations, 53, 54t–55t, 56f
    • need for accurate tools for, 46
    • point estimates, 53, 56–59, 56f
    • and probabilities vs. returns, 50–53
    • and required returns, 206, 206t
    • subperiods, 49–50, 60
    • summary of procedure for, 60–61
    • using Bellman's dynamic programming technique, 46–47
  • Traditional utility theory, 28, 178, 180
  • Transitive (axiom of rational choice theory), 12
  • Trusts, ix
  • Trust and loyalty, 156–157
  • Tversky, Amos, 6–7, 188, 192
  • W
  • Wealth:
    • dynastic, 158–159
    • future, as variable, 143
    • “get‐wealthy” vs. “stay‐wealthy” approaches to, 147–148
    • in goals‐based theory of utility, 3
    • initial, 18
    • pool of, 17
  • Wealth management, xviii
  • Wealth management firms, 199–207, 205f
  • “Wealth tax,” 159n6
  • Windfalls, 20
  • Windfall effect, 20
  • Wittgenstein's Ruler, 67
  • Y
  • YOLO trades, 164
  • Z
  • Zhu, K. X., 89
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